Should Amazon Buy AMC Theaters? Two CRE Experts Say Yes!!!

Introduction (Dave Cobb):

I have dynamic conversations with my amazing partners, Jon and Janet on a cherished daily basis. They have been sounding boards, innovative thinkers and rocks during a time of rapidly accelerating trends. Jonny and I had a discussion yesterday that I hope some of you find insightful.

Earlier in the week, I read that AMC stock spiked, up over 40%, on Monday because of rumors involving a potential acquisition by Amazon. At first, it didn’t make sense to me and I mentioned it to Jon to glean his insight. That call triggered a discussion rabbit hole and we walked away in agreement that the deal could make sense—given the right circumstances.

Key Stats:

• AMC Debt: $10.35 Billion (Courtesy Yahoo Finance)
• Locations: 650+ (USA) / 1,000+ (International)
• Footprints: (Multiple)

Jon’s Tactical Insight:

Why Amazon Buying AMC Makes Sense

You have to take a step back and consider that AMC is currently battling at least one Hollywood Studio, Universal Pictures, over the long-standing practice of protected theatrical release windows (typically exclusive for 75 to 90 days). Details below from a great article by Erich Schwartzel in the Wall Street Journal (WSJ - Trolls World Tour Breaks Digital Records and Charts a New Path for Hollywood):

• The recent Troll World Tour release direct-to-streaming at $19.99 brought in nearly $100m in rentals during the first 3 weeks. It set digital records at Amazon Prime Video, among others.
• Studios keep 80% of the revenue, as opposed to 50% from the box office.
• Jeff Shell, CEO of NBCUniversal, stated that “As soon as theaters reopen, we expect to release movies on both formats.”
• Adam Aron, CEO of AMC responded by saying that “his chain would refuse to book any of the studio’s movies as long as it pursues such releases.”
• If Amazon buys AMC, they might be less inclined to protect the theatrical release window making it easier for studios to release on streaming services simultaneously. The studios still have a battle ahead, but Amazon would effectively take out their largest opponent.
• We all pay for convenience, so it’s likely streaming services and studios would raise prices for digital. Amazon could also lower prices at the box office, putting pressure on other brick & mortar theater operators. Win-win for Amazon.
• Speaking of brick & mortar, AMC has a large footprint with over 1,000 locations (650+ in the USA). It’s likely we would see some of the properties spun-off, sold, redeveloped, or converted. It would not be hard for Amazon to upgrade the technology, experience, and concessions for those it kept.
• Depending on the location, zoning, and co-tenancy, some could be converted into strategically placed Amazon Fulfillment Centers.
• The challenge - AMC has accumulated crippling debt of $10.35B (according to Yahoo Finance). Any acquisition would include this debt unless AMC has previously filed for Chapter 11 Bankruptcy.

 Dave’s Tactical Insight:

Why Amazon Buying AMC Makes Sense

 Redevelopment opportunities for obsolete theater structures will be a key factor in the decision-making process. Some will be scrape redevelopments as Jon mentioned above, but I will focus on another key component of these structures—Clear Height.

• Clear height means that buildings can also go vertical and I believe Amazon is one of the few companies globally that will need significantly more office space in the coming years. They will create new business arms, expand rapidly, and add talented people.
• Are convertible structures a possibility? I wouldn’t be surprised if Amazon had an ace up their sleeve where the bones of theater could be converted into a multi-story structure. The interior could be layered with floors/mezzanines or the interior can be converted to storage cubes—this occurs frequently when big boxes are converted to self-storage.
• Why would Amazon want convertible buildings? As long as the globe has the holidays, Amazon will be a fundamentally seasonal business. I could see a scenario where a converted theater has a specific use or uses (Lockers, Amazon Go, Pop-Ups, 4Star or unknown concept) until November and is then converted to “Specialty Center”.
• If AMC were to declare bankruptcy the Landlord’s/Lessors will not collect any rent from a major anchor tenant. Landlords with theater anchored shopping centers will offload at a discount or lose the property to a default event. There will be ancillary real estate price drops, triggered by closures that will be opportunistic and lucrative real estate redevelopment plays.
• Could there be Antitrust hurdles? Awesome quote from Site Source affiliate Perry Russ at Zamias Services: "Truly surprising. It will be interesting to see how Amazon (as a movie-making studio/distributor) works around the antitrust legislation prohibiting joint ownership of an exhibitor".

Jon’s Alternative Buyer: Disney

• Disney could potentially turn-around the failing theater chain, and I will explain why:
• It would provide a dedicated distribution channel for iconic Disney films plus a library of additional blockbusters from the acquisitions of Marvel Studios, Lucasfilm (Star Wars), & Hulu. Disney could show both new and iconic films.
• By owning ESPN, they would have the exclusive right to show certain major sporting events. 
• A Disney Movie Theater Chain would be extremely desirable for kids’ birthday parties and other family occasions. Private rooms or theaters with rigid sanitation standards will generate high margin revenue during off-peak times. People will pay for seclusion and sanitation; especially in affluent markets.
• Placing Disney Stores at the entrance and exit to drive revenue is a no-brainer. You always exit through the gift shop at theme parks… at a theater, you’ll also have time to kill before the movie.

Dave’s Alternative Buyer: Dreamworks

 It appears that shrewd business, backchanneling, and political capital is being deployed in Hollywood. I could see a scenario where this is a scripted and expedited tragedy. The playwright is NBC Universal.

•  The tussle about release time could be a play by Jeff Shell to vertically integrate his supply chain. Dreamworks has been a dynamic brand with phenomenally done movies. Pulling their titles further hobbled AMC.
• This will allow for staggered releases, home, and theater, on NBC Universal’s schedule.
• It feels like the inevitable and calibrated expansion of a media conglomerate.

Conclusion (Jon Hellein):

 Severe market corrections tend to shake up industries and create opportunities. Movie Theater chains have struggled to offset declining traffic with higher ticket prices. It’s clear that they are now fighting a war on multiple fronts, including the unforced error of accumulating too much debt. Given the high-quality real estate AMC occupies, it is likely these are not the only potential suitors evaluating this take-over opportunity.  What we know for sure is that change here is inevitable given the current crisis.